31 October 2014

Brett King

Brett King - Moven

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Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

An orderly transition to the new branch state

04 May 2012  |  2913 views  |  3

I guess with a title like 'Branch Today, Gone Tomorrow' it's no surprise that a lot of people think I'm anti-branch. I'm not anti-branch, I just don't drink from the branch kool-aid fountain that goes something like "if only we could find the right formula we'd reverse this trend of not visiting the branch and customers would flock back to our physical space". I think most Bankers and Credit Union executives, instinctively feel there is a change in the importance of the 'channel mix', but as often as I hear questions about how quickly this is going to occur, I hear executives talking about how customers used to behave. "But don't customers need to come into a branch for lending products; to talk to a loan officer about more complex products?" This is a legitimate question in the old world, but it's light on today in respect to the facts, which don't actually indicate the branch is central to lending.

The fastest growing lending institutions in the country right now aren't the big banks, community banks or even credit unions. The fastest growing lenders certainly aren't mortgage brokers. The fastest growing lenders in the United States at the moment are actually peer-to-peer social networks, namely Prosper and Lending Club (thanks to @netbanker for this gem). In terms of percentage growth of loan book, you'll be hard pressed to find any FDIC insured institution doing better. In fact, I'd wager that a 375% increase in Loan Originations in the last 18 months, coming off the back of the Great Recession as the global financial crisis is being called, is one of the most impressive new FI growth stories you're likely to hear globally.

Last time I checked, neither Prosper, Lending Club or Zopa had any branches...

Why customers think they want branches
Now my point here is not to argue that P2P Lending is better, it is to argue that the perception that to sell a complex product you require bricks and mortar, just isn't supported by the data. To be fair, however, there is actually some valid behavioral data at work here that comes out through qualitative research supporting the role of the branch for legacy customers. That is, that there are still plenty of customers who say they want a branch - that doesn't mean they will visit it, but they like to have them around. In Branch Today I examined the data and reasons for the recent rapid decline in branch activity, both from a visitation and transactional measure, but the question is why some customers still say they want to visit a branch?

There’s really only three things that drive a customer to a physical branch:

  1. I need a physical distribution point to deposit cash (primarily for small retail businesses)
  2. I need advice or a recommendation for a product or need I don’t fully understand, or
  3. I have a humdinger of a problem that I couldn’t solve offline, so I’m coming into the branch to get relief.

Branch bankers hang on to #2 for dear life, hoping that this will somehow keep customers coming back, helping justify those massive budget line items dedicated to real-estate; sadly it just isn't happening that way. And yet, when you ask customers what determines their choice of 'bank' relationship, often the convenience or availability of a local branch, remains a stalwart factor.

Since the mid-80s, branches the world over have generally been transformed into streamlined cost/profit centres. The industry has attempted to reduce cost and improve efficiency to optimum levels and in this light customers have been forced to trade off between either big bank efficiency and utility, or the personalized service of a high street, community banker interaction without all the bells and whistles.

Despite this drive for efficiency there’s still a lingering psychology of safety in physical banking place and density, which stem from long memories over epidemic ‘runs’ on the banking system during the great depression. So what remains are two core psychologies that play to the need for physical places which reinforces the safety of a "bank" where they're going to entrust their cash:

  1. I recognize that I visit the branch less and less for banking, but I'd like it to be there just in case I need to speak to someone face-to-face about my money or I have a problem, OR
  2. The more branches you have, the less likely you’ll go under in the case of a ‘run’ on the bank

But who is going to pay for the space?
The big problem with this, of course, is that as customers more commonly neglect the branch in favor of internet, mobile, ATM and the phone (call centre), the economics of the real estate and branch staff is no longer sustainable. So how do you have a space that still ensures the confidence of those customers that require the psychological 'crutch' of a space they might need to go to, but who aren't willing to pay more for the privilege and won't change their day-to-day banking habits back to the branch because the web and mobile are just so much more convenient?

The answer is two-fold.

-- The Flagship Store --
If you need to instill confidence in the brand, then the best way is to build a new, large square footage space that screams new-age, tech-savvy branch banking with coffee and comfy chairs! Think the opulent Airline loyalty lounges that started to emerge in the late 80s. Think Virgin Megastores or the "Gold Class" cinemas of the 90s. Think Apple Stores today.

Brand spaces that inspire confidence. Enable a connection with your customers. Spaces that tell customers you're all about service, advice and solving their banking problems - not about tellers and transactions.

Jeff Pilcher at FinancialBrand.com regularly covers the best of these new Flagship and Concept Stores, so head over there if you want some examples to work from. However, this is not exactly going to lower your bottom line around distribution. If anything it's going the other way. Knowing that you're going to have to downsize, the average FI will only be able to support a handful of Flagship stores in key, high-traffic, high-visibility location. So how do you equalize the ledger?

-- The Satellite Service Space --
Supporting the Flagship stores at your secondary locations (i.e. anywhere that is not your best, most densely populated geography) will be very simple, cash-less brand presence stations. These will be small spaces in prime traffic locations like shopping malls, without any teller space, but the space to service the pants of a customer who needs that advice or help with a sticky problem. If they want cash, there will be an ATM. If they want to deposit notes or checks, the ATM can do that too, or you might incorporate a dedicated check deposit machine in the space too. In fact, the bank representative in the space could just use his iPad for that - although it's better to move them to the ATM and go no transaction in the service space.

A good example of this sort of space would be the likes of smaller UPS franchise stores, or the BankShops of the TESCO variety in the UK. Small footprint of no more than 300-500 square feet, but enough space to represent your brand and tell customers they can still come and see if you if they need a solution.

The ratio of flagship store to satellite spaces will probably be at least 10 to 1, if not greater. You don't need every branch to be "big" in the new reality; to give your customers a level of comfort that you are safe enough to put your money with them. In fact, as the likes of UBank, ING Direct and Fidor show, for some customers you don't need any spaces. But for those that still want a space 'just-in-case' then this strategy is a great transitional approach.

One day soon, within the next decade, we'll need less than half the branches we have today. But as we make that transition, the need for a space to be available to provide service and support remains a key component of what we call financial SERVICES. It just doesn't have to cost us the earth.

You don't need a big space to provide service TagsOnline bankingRetail banking

Comments: (4)

Tim Tyler - Misys - London | 04 May, 2012, 09:42

Brett, you go to pay in a supermarket. There are no queues (fanciful idea, I know, but stay with me). You have the choice of going to a checkout where a member of store staff will scan your shopping, or you can go to an automated checkout ("unexpected item in the bagging area"). Which do you choose?

For me, I choose the staffed checkout everytime, even if I know it might take longer to checkout.

Sometimes, people value that human interaction. They want the service they believe they are paying for.

Flagship / satellite might be the way to go, and in those geographies that are seeing the decimation of the high-street, would allow banks to be where there customers are - perhaps we'll even start seeing popup banks. Popup banks would also allow those online organisations that offer people the ability to move and bank to have a real-world presence for customer acquisition (although when does a trade-stand become a popup bank?).

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Brett King - Moven - New York | 04 May, 2012, 09:54

Tim,

I hear what you are saying, and that's largely why I wrote the blog - so that it's not cold turkey turning off all the branches. However, make no mistake - someone has to pay for all these branches and when customers don't visit branches, then they're just a cost. 

What we're learning now through observational and behavioral data is that people say they want a branch, but that doesn't change the fact that they only visit a branch twice a year. When you do the maths, even the most profitable retail banks won't be able to operate on that basis for another decade. 

I get your illustration, but I'm also willing to bet that you withdraw cash from an ATM machine. Using your logic I should only withdraw cash from a teller - because of the human touch. Why don't I? Because it's a total and utter waste of time. Convenience drives me to more efficient means. Today, the branch simply is no longer the most convenient way to bank, so the majority of us time poor individuals make a trade off. While we'd like the option of human touch/face-to-face, we don't have the luxury of driving down the high street, waiting in line and seeing a real banker, when we can get the same utility on our mobile phone, tablet or via internet.

It's a trade off. Ask record stores and travel agents - they'll tell you how it works...

BK

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Tim Tyler - Misys - London | 04 May, 2012, 10:21

Agreed, and that's why I think your thoughts on flagship / satellite are well-founded. For those people and times when it has to be face to face, how can the banks service this whilst also dramatically reducing the cost per interaction/transaction.

What my example also demonstrates, I believe, is how important the experience is regardless of the channel being used. ATM's are painless to use (for the vast majority of us), self-checkout is the complete opposite. UX is therefore a key element. I am still surprised by certain online/mobile sites/apps where it is a struggle to work out how you can achieve what you want to do.

Banks should be acutely aware of this, and constantly evolve their offerings, rather than a fire-and-forget approach that I too often see. 

There is a great article on A/B testing in the current edition of Wired magazine that I can recommend to all.

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Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune | 07 May, 2012, 13:54

@BrettK:

Agreed that it makes no sense to drink from the said branch kool-aid fountain.

Payday loan providers largely operate through branches and are still thriving. PROSPER, Zopa and other P2P lending services don't have branches and are growing rapidly. Both owe their positions to their differentiating business model of serving customers with high credit risks who won't qualify for loans from mainstream banks - not to their respective channel strategy.  

For that matter, if a bank offers a credit card only at its branches to people with subprime FICO scores, I'm sure enough people will flock to the branches. This won't prove that branches are better than other channels. 

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